Reference no: EM132879150

Colt Systems is facing a financial distress. Colt has a loan of $1.5 million due at the end of the year. Without a change in its strategy, the market value of its assets will be only $1.3 M at that time, and Colt will default on its debt. Colt is considering a new strategy.

• The new strategy requires no upfront investment, but it has only a 30% chance of success. If the new strategy succeeds, it will increase the value of the firm's asset to $2 million. If the new strategy fails, the value of the firm's assets will fall to $900,000.

Problem 1: Would shareholders of Colt be interested in pursuing the strategy? Explain, provide necessary calculations.

Problem 2: Would debtholders of Colt be interested in pursuing the strategy? Explain, provide necessary calculations.

Problem 3: If chance of success of the strategy were only 1% would shareholders be interested in the strategy. Explain without the aid of computations.

Problem 4: What is the situation (conflict) described in the problem called?

Problem 5: If the amount Colt owed were only $700,000 would the above conflict arise? Explain, provide computations.